When Chemist Warehouse’s 78-year-old co-founder, Jack Gance, speaks at the ringing of the bell on Thursday morning for the formal listing of the new pharmacy and healthcare behemoth on the ASX, he can be expected to reflect on the 50-year journey undertaken by him and his brother.
As a major shareholder (he and brother Sam, 75, will have 27 per cent of the newly merged company, with co-founder Mario Verrocchi having another 22 per cent), Gance has a vested interest in reflecting on their success in building up the company, from their humble beginnings in the Melbourne suburb of Reservoir, and talking up its potential.
No one doubts that the Gance brothers and Verrocchi are super successful, hard-nosed retailers who have done a stunning job creating Chemist Warehouse: driven, self-made retailers of the ilk of Harvey Norman’s Gerry Harvey and Premier Investment’s Solomon Lew.
But the question for shareholders and potential shareholders is, where to from here?
Where to for the merged group – a reverse takeover of the privately owned Chemist Warehouse giant into the much smaller ASX-listed Sigma Healthcare – now that more than a year of uncertainty is behind it with the ASX listing now done?
The combined group is estimated to have an initial market capitalisation of $36bn, compared to the current $4.6bn of Sigma Healthcare.
The group has the potential to be an even larger player in the fragmented pharmacy business in Australia and overseas, using its newly combined financial firepower to open more stores in Australia and around the world.
But how much of the upside has already been priced into the deal? How will the once fiercely private Chemist Warehouse group handle the transition to the scrutiny of a major publicly listed group? And where to for the shareholding for the Gance family and friends?
Will the collective shareholding of the founders and the other 37 per cent held as of Thursday morning by other Chemist Warehouse shareholders be an overhang on the market?
Or will Australian retail and institutional shareholders jump at the chance to invest in what will be one of Australia’s largest listed retailers with a combined turnover of $6.6bn, earnings before interest and tax of $605m and net profit of $522m?
Sigma shareholders have already enjoyed significant upside after the deal. Their shares were trading at less than 80c before the announcement of the proposed merger in December 2023.
The shares of the listed company rose to more than $3 after the merger was approved by shareholders of both groups in January but has since eased off to around $2.79 on Wednesday.
The merged company will have the largest retail network of franchised pharmacies – 880 stores with a core suite of franchise brands – Chemist Warehouse (which currently has 630-plus stores), My Chemist, Amcal and Discount Drug.
The deal has been given extensive publicity in the financial media but there has been a cautious view among some analysts who see it already fully priced.
One retail broker contacted by The Australian on Wednesday said few of his clients had asked about it and argued that its dividend yield would need to pick up to get retail investors’ interest.
Macquarie analysts say they expect it to trade at a premium “given quality and growth characteristics” but add that their “bullish earnings forecasts still suggest a downside to the current share price … We expect price discovery post-implementation.”
That is, it could be a rocky road ahead as the 37 per cent of Chemist Warehouse-held shares of the new group which are not escrowed are free to be sold.
The shareholdings of the Gance brothers and Verrocchi are subject to a two-stage escrow period – 10 per cent of which (5 per cent of the new company) can be sold after August this year or after the release of the 2025 financial year results, while the rest (about 44 per cent of total shares in the new company) can be sold in August next year or after the release of the 2026 annual results.
Potential investors will be watching closely to see how quickly the company can be included in the ASX50 index. This will depend on it meeting the requirement for sufficient free float. Macquarie estimates this won’t take too long.
Once that is done, it will attract a new class of shareholder in the form of index funds.
Gance can be expected to talk on Thursday about how he and his brother set up their first store in 1972, part of the Amcal chain. They hired newly minted graduate Mario Verrocchi in 1980.
In 2000 Jack Gance and Verrocchi went out on their own, to found the Chemist Warehouse group (initially Chemistop) with a new store in Footscray in Melbourne. They launched the Chemist Warehouse brand in 2003 with an aggressive franchise-driven growth strategy taking store numbers to 100 by 2008.
The company was an early mover in the China market, establishing a partnership with Alibaba’s TMall Global in 2015 – a move driven by an entrepreneurial Chinese Chemist Warehouse pharmacy operator, Nancy Jian, who could see the interest in its products by Chinese customers including Australian-based local Chinese shoppers or daigou.
Its products have regularly done well with Chinese customers in the annual November 11 Singles Day sales.
The move drove Gance (who was originally unenthusiastic about eCommerce) to step up the company’s focus on selling online, establishing a dedicated online fulfilment centre in the same year and encouraging it to expand its logistics and distribution centre network.
It moved into New Zealand, where it now has 50 stores, in 2017, and into Dubai in 2024.
While the company has signalled plans to continue its store rollout in Australia and offshore, the next few years will also see a heavy attention to cost control.
Company chair Michael Sammells told investors in the prospectus that the merged group can deliver $60m a year in synergies by the fourth year “through the rationalisation of duplicate costs and supply chain optimisation” across the combined business.
Verrocchi will continue to run Chemist Warehouse, reporting to current Sigma chief executive Vikesh Ramsunder who will run the combined listed group.
As a big new player on the ASX at a time when there have not been many big names coming to the Australian market, the fortunes of the combined group will be closely watched.
Jack Gance has a good story to tell about the massive growth of his empire, and his 50-year career in retail pharmacy.
But shareholders and potential investors will be looking to the future when deciding on where to put their money.
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